Brokers' take: UOBKH initiates Trans-China Automotive with 'buy', S$0.39 target price

DEMAND for Trans-China Automotive's (TCA) VI2  : VI2 0% after-sales service for BMW cars is expected to grow in line with the increasing BMW automobile population and the car dealership's growth in new automobile sales, according to UOB Kay Hian (UOBKH).

In a report on Friday (Nov 26), the research house commenced coverage on TCA with a "buy" call and a target price of S$0.39, or 6 times its estimated earnings for FY2022.

The multiple is at a 25 per cent discount to the Catalist-listed company's peers, which UOBKH said takes into account TCA's smaller dealership network.

Still, it noted that the company could add to its dealership network down the road. This, coupled with better operating efficiency, could see its discount to peers narrow, said the research team.

UOBKH highlighted that TCA has plans to increase its concentration of businesses in regions where operations exist, and is also looking to grow its dealership network to new regions outside of the cities it already operates in.

With BMW being the main automobile brand under TCA, UOBKH believes that the dealership will be able to ride on the burgeoning growth of luxury car ownership in China. The country has seen the number of high-net-worth individuals grow at a compound annual growth rate of 54.4 per cent from 2016 to 2020.

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"Consumer demand for premium and ultra-premium automobiles is expected to grow with the rising number of high-net-worth individuals, given their spending power and higher propensity to spend on aspirational products, often regarded as status symbols," said the research team.

BMW was also ranked second in China's premium automobile market in terms of sales volume between 2016 and 2020, with the number of BMWs in operation in the country growing at a compound annual growth rate of 16.9 per cent in those 4 years.

Noting that the after-sales services segment had the largest contribution at 66 per cent to TCA's gross profit in 2020, UOBKH expects demand for the segment to grow, in line with the rising BMW automobile population and TCA's growth in new automotive sales.

The dealership's absorption ratio - which refers to the ratio of the after-sales services gross profit to the dealer's operating cost - is high, and this provides high earnings visibility for the segment, said UOBKH.

TCA's dealerships in Foshan, Shenzhen and Guangzhou saw an absorption ratio of 171.7 per cent, 111.5 per cent and 105.2 per cent, respectively. This is ahead of industry-leading players ZhongSheng Group Holdings' 104 per cent, China Yongda Automobile's 82.5 per cent, Harmony Group's 80.1 per cent, and China Grand Auto's 75.3 per cent.

"In our view, TCA's high service absorption rate is helped by TCA being among the top three BMW automobile dealerships in the Greater Bay Area," said the research team.

Shares of TCA were trading S$0.005 or 1.7 per cent lower at S$0.285 as at 11.54 am on Friday.